Willis Towers Watson PLC (WTW) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the fourth-quarter 2016 Willis Towers Watson earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

I would like to introduce your host for today's conference Ms. Aida Sukys, Director of Investor Relations.

Ma'am, please go ahead.

Thank you.

Good morning.

Welcome to the Willis Towers Watson earnings call.

On today's call are John Haley, Willis Towers Watson's Chief Executive Officer, and Roger Millay, our Chief Financial Officer.

Please refer to our website for the press release issued earlier today.

Today's call is being recorded and will be available for replay via telephone through tomorrow by dialing 404-537-3406 conference ID 53649380.

The replay will also be available for the next three months on our website.

This call may include forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 involving risks and uncertainties.

For a discussion of the forward-looking statements and the risks and other factors that may cause actual results or events to differ materially from those contemplated by forward-looking statements, investors should review the forward-looking statements section of the earnings press release issued this morning, a copy of which is available on our website at willistowerswatson.com as well as other disclosures under the heading of risk factors and forward-looking statements and our most recent annual report on Form 10-K and quarterly report on Form 10-Q and in other Willis Towers Watson filings with the SEC.

Investors are cautioned not to place undue reliance on any of these statements which speak only as the date of this earnings call.

Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events.

During the call we may discuss certain non-GAAP financial measures.

For a discussion of the non-GAAP financial measures as well as reconciliation of non-GAAP financial measures under Regulation G to the most directly comparable GAAP measures, investors should review the press release we posted on our website.

After our prepared remarks, we will open the conference call for your questions.

Please note today's call is scheduled for one hour.

Now I'll turn the call over to John Haley

Thanks Aida.

Good morning everyone.

Today we will review our results for the fourth quarter of 2016 and provide updated guidance for the full year of 2017.

We will also provide consolidated full-year 2016 and certain pro forma 2015 financial results.

Our segment results are presented based on the updated Willis Towers Watson structure.

We provided historical Willis Towers Watson segment information in a Form 8-K filed on July 14, 2016.

Now let's turn to our results which marked the end of our first year as Willis Towers Watson.

Reported revenues for the quarter were $1.9 billion, flat as compared to pro forma prior year revenues.

This includes $74 million of negative currency movement on a pro forma basis.

For the quarter, revenues on an organic basis were up by 1%.

Reported revenues for the year were $7.9 billion, up 5% as compared to pro forma prior-year revenues.

Adjusted revenues for the year were $7.9 billion, up 6% as compared to pro forma prior-year revenues.

This includes $202 million of negative currency on a pro forma basis.

For the year, organic revenues were up by 2%.

Net income attributable to Willis Towers Watson for the quarter was $34 million as compared to the prior year pro forma net income of $66 million.

Adjusted EBITDA for the quarter was $419 million or 21.7% of revenues as compared to the prior year pro forma adjusted EBITDA of $406 million or 21.1% of revenues.

We are pleased to see year-over-year margin enhancement which is consistent with our goal.

Adjusted EBITDA for the year was $1.8 billion or 22.3% of adjusted revenues as compared to pro forma adjusted EBITDA for the prior year of $1.7 billion or 22.5% of adjusted revenues.

For the quarter, diluted earnings per share were $0.25 and adjusted diluted earnings per share were $1.88.

Currency fluctuations net of hedging had a positive impact of $0.19 on adjusted diluted EPS.

For the year, diluted earnings per share were $2.26 and adjusted diluted earnings per share were $7.96.

Currency fluctuations net of hedging had a positive impact of $0.08 on adjusted diluted EPS.

Before moving on to the segment results, I'd like to highlight the progress made in 2016 and provide an update on three areas of integration: revenue synergies, cost synergies and tax savings.

Reflecting on our first year as Willis Towers Watson, we've accomplished a great deal in a relatively short amount of time.

We've developed integrated market offerings for our stated revenue synergies.

We've also taken steps to enhance our profitability margins with OIP, a business restructuring program and cost merger synergies.

Finally, we've also refined our focus of financial discipline for long-term growth and enhanced our focus on business fundamentals.

The impact of the benefits from the revenue synergies and cost programs will grow in 2017 and we feel we've made very good progress against all of our objectives so let me highlight some of these accomplishments in more detail.

I'll start with the revenue synergies.

As I mentioned in a previous earnings call, the 2016 revenue synergies were about 5% to 10% of our stated 2018 revenue synergy targets.

So while they are only a small portion of the overall goal, we're very pleased with the efforts in achieving and in some cases surpassing our 2016 revenue synergies sale goals.

Our merger objective identified three specific areas of revenue synergies: global health solutions, US mid-market exchange and large market property and casualty.

Let's start with global health solutions.

During 2016 we won 23 global or regional projects valued at over $18 million and 120 were smaller single-country projects for an additional $5 million.

Turning to the US mid-market exchange synergies, we added about 75,000 employees which will provide approximately $15 million annually.

Lastly, we surpassed the 2016 P&C revenue synergy goal with placements of almost 30 accounts representing eight different industries for approximately $12 million.

On the tax front we surpassed our original goal of a 25% adjusted tax rate a full year ahead of schedule.

The 2016 merger-related cost-savings guidance was estimated at $20 million of savings in calendar 2016 and I'm pleased to report that we ended the year with almost $40 million of savings.

We feel very confident in meeting our 2018 cost-savings objectives of $100 million to $125 million.

Through the efforts of the operational improvement program or OIP we saved approximately $89 million during 2016.

We anticipate additional savings of $95 million as we exit 2017.

The OIP program is expected to be completed at the end of 2017.

In addition to the OIP program, we initiated a business restructuring program during the third quarter of 2016 which was completed in the fourth quarter.

The restructuring impacted approximately 450 positions across all segments which cost approximately $50 million.

The majority of this cost was incurred in the fourth quarter.

We are very focused in delivering on our various cost initiatives, the OIP, cost-related merger synergies and business restructuring to drive improved margins in 2017.

Now let's look at each of the segments in more detail.

For the quarter, total reportable segment constant currency commissions and fees growth was 3%.

Constant currency commissions and fees for human capital and benefits were flat.

Corporate risk and brokering increased 6%.

Investment risk and reinsurance decreased 3% and exchange solutions increased 21%.

All of the revenue results discussed in the segment detail and guidance reflect commissions and fees constant currency unless specifically stated otherwise.

Turning to human capital and benefits or HCB.

HCB commission and fee growth was flat.

On an organic basis, commissions and fees decreased 2%.

The HCB segment experienced the largest impact of the business restructuring effort.

More than 325 positions were eliminated.

This restructuring was intended to create better alignment with client expectations and market demand and also to improve our leverage model.

However given the size of this initiative in the HCB segment, we experienced more business disruption in this segment than in any of the others.

Retirement commissions and fees were down as a result of a decrease in actuarial fees partly offset by new pension administration client fees.

The business restructuring impacted almost 160 positions, mainly in Europe and the US.

Demand for consulting assignments was down in the Netherlands and we are in an off-cycle period of pension negotiations in the UK which typically occur every three years.

There was also less data-related project work associated with bulk lump sums than anticipated.

Talent and rewards commissions and fees were down primarily due to a decline in executive compensation and reward and talent and communication work in North America.

The restructuring impacted over 100 positions in talent and rewards.

We saw fewer transaction-related projects and uncertainty on regulatory and economic conditions in advance of the US November elections.

Healthcare consulting continued to see commission and fee growth primarily as a result of new business won outside of the North American region.

Technology and administration solutions, or TAS, continued to produce strong results due to new clients.

We continue to have a positive outlook for the HCB business in 2017 and expect momentum to build during the year.

Turning to corporate risk and brokering, or CRB, commissions and fees grew 6% from the prior year as a result of the Gras Savoye acquisition.

On an organic basis commissions and fees were flat.

Revenue increased in all regions except for North America.

Great Britain's revenue increased due to growth in construction, retail and aerospace.

Western Europe grew as a result of Gras Savoye and the Affinity business in northern Europe.

International revenues increased as a result of Gras Savoye.

A slight rebound in the Venezuela and Brazilia P&C businesses was offset by continued softness in Asia and Central and Eastern Europe, Middle East and Africa.

Revenue declined in North America as a result of less new business.

We expect the general pricing trends to continue into 2017, but we also expect that we will gain momentum as we move into the second half of the calendar year.

Now to investment risk and reinsurance.

Commissions and fees were down by 3% for the quarter.

Organic commissions and fees declined 3% primarily due to a decline in reinsurance and portfolio and underwriting services.

The reinsurance line of business represents [tree-based] reinsurance only.

The facultative reinsurance results are captured in the CRB segment.

North America reinsurance and specialty revenue growth was more than offset by revenue declines in the international region and in portfolio and underwriting services due to weakness in underlying premiums and profit-sharing programs on certain contracts as well as rate competition.

The fourth quarter is seasonally the softest quarter of the calendar year for IRR.

We continue to see wholesale delivering solid results from Miller.

Investment experience growth as a result of increased performance fees in the delegated investment services business.

We're targeting growth for the IRR business in 2017.

While the overall environment may not be changing dramatically, prior year comparables are soft and the sales pipeline is more robust in certain lines of business.

Lastly, exchange solutions finished up the year with another outstanding quarter with commissions and fees of $174 million, an increase of 21%.

Driven by record enrollments, our retiree and access exchange revenues increased 34% and the rest of the segment increased 9%.

Increased membership in new clients drove the revenue increases.

Our health and welfare and North American pension outsourcing businesses continue to grow primarily as a result of the new business won over the last two years which added almost 400,000 lives.

We had a very successful exchange enrollment season.

As a reminder, revenues are generally recognized as the healthcare plans become effective which is January 1 for most of our enrollments.

Revenues are recognized on a prorated basis through the calendar year.

We enrolled approximately 110,000 retirees and more than 250,000 total lives on the active exchange, our biggest active enrollment ever.

Approximately 65% of the active enrollments were on the liaison platform and the balance were enrolled on our large company platform.

We continue to find that first-year savings are between 5% and 15%.

Now most of our clients target a savings of 5% to 8% as they custom configure their plan design.

That equates to a first-year savings of approximately $500 per employee.

Our 2017 sales pipeline continues to look strong especially in the midmarket.

Large companies continue to be more deliberate in their decision-making process, but we have four large clients that have already committed for the 2018 enrollment period.

We expect the midmarket to continue adopt at a faster pace than the large companies.

We anticipate the revenue growth to slow a little bit in 2017, but continue to feel good about the momentum of this business in the long term.

Perhaps one of the most important developments of 2016 was confirmation of the merger rationale.

While the 2016 revenue performance may not fully reflect our integration and sales efforts, the commitment I see from our colleagues throughout the organization and the steps we have taken to build the framework for long-term success gives me great confidence in achieving our merger objectives.

We still have a lot of hard work ahead of us, but the momentum continues to build.

Most important we have to keep focusing on our clients, carry forward the financial disciplines initiated in 2016 and continue to work collaboratively as we build and improve our go-to-market strategies.

I'd like to conclude my comments today by thanking all of our colleagues for their hard work over this last year.

I'm looking forward to reporting on our future success.

Now I'll turn the call over to Roger.

Thanks John and good morning everyone.

I'd like to add my thanks to our colleagues around the globe for all their efforts during 2016.

As we take a step back and consider the progress we've made in just 12 months, bringing together 40,000 colleagues from three legacy companies in over 140 countries, it's really quite an accomplishment.

While we still have a couple of years to complete our integration, the actions required in the first year of building a new organization and culture are the hardest and most sensitive.

There is simply a lot of change to absorb.

It took a lot of collaboration and commitment to get us where we are today.

And as we turned into our second year, I saw the necessary foundation for our ultimate success building in the right direction.

Now for the financial results.

As a reminder, our segment margins are before consideration of unallocated corporate costs such as amortization of intangibles, restructuring costs and certain integration expenses resulting from mergers and acquisitions.

The segment results include discretionary compensation.

Income from operations for the quarter was $88 million or 4.6% of revenues.

The prior year fourth-quarter pro forma operating income was $131 million or 6.8% of pro forma revenues.

Adjusted operating income for the quarter was $374 million or 19.4% of revenues and the prior-year quarter pro forma adjusted operating income was $377 million or 19.6% of pro forma revenues.

As we highlighted earlier, revenue pressure and seasonality related to Gras Savoye impacted the fourth-quarter margin.

Income from operations for the year ended December 31, 2016, was $551 million or 7% of revenues.

The prior year pro forma operating income was $765 million or 10.2% of revenues.

Adjusted operating income for the year ended December 31, 2016, was $1.6 billion or 20.4% of adjusted revenues and the prior year pro forma adjusted operating income was $1.5 billion or 20.2% of pro forma revenues.

The GAAP tax rate for the quarter was 3% and the adjusted tax rate was 19%.

For 2016 the GAAP tax rate was 3% and the adjusted tax rate was 21%.

Before we discuss the segment operating results, I'd like to remind you that we provided recast segment operating income for the prior periods in the Form 8-K we filed on July 14, 2016.

Additionally our segment margins are calculated using total segment revenues.

For the fourth quarter, the operating margin for the human capital and benefits segment or HCB was 20% as compared to pro forma 21% in 2015.

As expected, the 2016 margin trended lower due to the Gras Savoye margin being lower than the Company average.

Revenue performance also impacted margin.

For the year ended December 31, 2016, the HCB segment operating margin was 21% as compared to pro forma 22% in 2015.

For the fourth quarter, the CRB business or corporate risk and broking had a 32% operating margin as compared to a pro forma 33% in the prior-year fourth quarter.

Western Europe, as a result of Gras Savoye seasonality and lower margin profile, drove the margin down.

Operating margin was 21% for both the year ended December 31, 2016, and pro forma 2015.

For the quarter, the investment risk and reinsurance segment or IRR had a 1% operating margin as compared to pro forma negative 3% in the prior-year fourth quarter.

The margin improvement was from investment, RCS and wholesale.

IRR experiences a seasonally low operating margin in the fourth quarter primarily driven by the timing of revenue in reinsurance.

For the year ended December 31, 2016, the IRR segment operating margin inclusive of the JLT legal settlement was 21% as compared to pro forma 19% in 2015.

For the quarter, the exchange solutions segment had an 8% operating margin as compared to a pro forma 10% margin in the prior-year fourth quarter.

TAS and retiree and access exchanges led the segment with 23% and 18% operating margins respectively as we continued to invest in the active exchange.

For the year ended December 31, 2016, the exchange solutions segment operating margin was 16% as compared to 11% pro forma in the prior year.

Moving to the balance sheet, we continue to have a strong financial position.

Free cash flow was $288 million in the fourth quarter and $745 million for the year ended 2016.

This was almost $100 million greater than our original expectation as noted during our Analyst Day.

We continue to focus on enhancing free cash flow in 2017.

This stronger free cash flow provided the capital to repurchase approximately $400 million of Willis Towers Watson stock in 2016 rather than the previously announced $300 million we had initially targeted.

In November we increased our share repurchase plan by $1 billion and anticipate a total repurchase of about $0.5 billion for 2017.

On February 8, 2017, the Willis Towers Watson Board of Directors approved a 10% increase to the regular quarterly cash dividend which will now be $0.53 per common share per quarter.

This is targeted to maintain the payout ratio of approximately 25%.

Now let's review our guidance for FY17.

In FY17 we are expecting constant currency revenue growth to be in the 2% to 3% range.

Constant currency and organic revenue will be aligned as we now have a full year of results for all of the 2015 acquisitions.

We expect adjusted EBITDA to be in the range of 23% to 24%.

We continue to drive our business improvement and cost-reduction programs and expect to demonstrate clear momentum in 2017 toward our goal of a 25% adjusted EBITDA margin.

For segment revenues, we are expecting low single-digit constant currency commissions and fees growth for HCB, CRB and IRR.

As we put a year of integration and restructuring focus behind us, we expect to see gradual growth enhancement in these businesses as the year goes on.

Exchange solutions revenue growth is expected to slow to around 10% due to stabilization of the retiree enrollments.

As we've mentioned previously, the retiree enrollments will be episodic from year to year depending on the timing of large clients joining the exchange.

While we continue to expect the actives exchange growth to be very strong, the enrollment base is still relatively small.

As of 2017, we're aligning the Max Mathiessen business from HCB to IRR and the fine arts and jewelry team from IRR to CRB.

In addition, we are harmonizing corporate expense allocation methodologies.

The changes made for 2017 will have an impact on year-over-year segment margins.

Given these changes, we will not be providing segment margin guidance in 2017.

You will continue to see the segment margin results each quarter and we plan to file a year-over-year comparison prior to our first-quarter earnings.

The 2017 adjusted tax rate is expected to be 23% to 24%.

The tax rate is expected to increase from 2016 due to one-time discrete items which will not repeat in 2017.

Adjusted diluted EPS is expected to be in the range of $8.40 to $8.55.

Guidance assumes average currency exchange rates of $1.25 to the pound and $1.08 to the euro.

We expect to generate approximately $30 million in merger cost synergies in 2017 and incur approximately $180 million of expense for integration related items.

We are making good progress on the cost synergies and expect to achieve the high end of our 2018 savings goal of $100 million to $125 million.

Integration expenses and restructuring costs will continue to be adjusted from our GAAP measures.

As John mentioned earlier, we expect to save approximately $95 million from OIP in 2017, the final year of the program, and plan to spend approximately $140 million.

The OIP restructuring will continue to be adjusted from GAAP measures.

Finally, depreciation is expected to be approximately $175 million to $195 million and capital expenditures are expected to be approximately $250 million.

As we have been discussing, 2016 was a year of building a new organization; a new way to address our clients' needs; and developing strong focus on financial management.

I think we've succeeded in building this foundation and I expect to see our financial performance momentum grow in 2017.

Now I'll hand it back to John.

Thanks Roger and now we'll take your questions.

(Operator Instructions)

Ryan Tunis, Credit Suisse.

Hey thanks.

Just following up on the segment outlooks for brokerage and for HRB next year, it sounded like low single-digit organic expense growth which implies a decent amount of acceleration from what we've seen year to date especially on the brokerage side.

Looking back at 2016, you talked a little bit about the revenue synergies.

How much do you think revenue dissynergies may have impacted that comp?

Because I'm trying to bridge from where we've been in corporate risk and broking in IRR which has been zero to sub zero to getting that to low single digits.

Thanks.

Okay, Roger may want to add to this, but I would say I think revenue synergies did not play any significant effect at all.

Frankly, we didn't really see any revenue dissynergies really across the Company.

I think the reason for the revenue growth being off in 2016 was really reflected in a distraction that we had that took people -- had them more internally focused than it should have been, didn't have the best go-to-market operation that we could have had and it distracted from our new business efforts.

But I don't think revenue dissynergies were anything that really added to that.

Okay and then my follow-up is just on thinking about 2% to 3% organic growth this year and looking out to 2018 thinking about the $10 number; do you think you need acceleration off the 2% to 3% in 2018 to be able to hit that or are we still thinking that capital management and organic expense management can produce those type of results even if we are still in a 2% to 3% organic growth environment?

Thanks.

I would say this with regard to the $10 number, when you think about the various components that we had to get there.

One of them was certainly revenue growth.

Really we thought 3%-plus was where we needed to get to that to be achieving $10.

The other items were our tax rate getting to 25% or better and I think we've got a check next to that.

Our share repurchase, you know actually, if you think about last year, in the beginning of the year we said we were going to try to be -- purchase $200 million worth of shares last year.

And then midway through, we said we'd like to get to $300 million; we ended up purchasing $400 million.

So we feel good about what we were able to accomplish there.

As Roger said, we expect to buy back at least $500 million worth of shares this year, so that's in place as to where we want to be; and we will continue to buy shares back in 2018 also probably at a higher clip than we have in 2017.

And then we want to get the expense savings and the margin enhancement; and we referenced a couple of times some of the OIP savings that we expect to get coming out of 2017.

So we're on board for almost all the things.

We just see we have to get the revenue growth up a little bit but we are focused right now on getting to the 2% to 3% level for 2017 and we think that will give us a good base to improve that going into 2018.

Okay and then just lastly, on the retirement business, if you could just help us understand the macro sensitivity of that just given the move higher in rates, the new administration.

It sounds like a lot of the slowdown there was less actuarial work, lump sum, but it sounded like it was maybe being replaced with pension administration.

How should we think about that if interest rates are where they are, continuing to rise?

Is that an area where you are going to continue to see sluggish organic growth?

Thanks.

Yes, I think overall that's right.

We've had some of our competitors have reported and when you look at our retirement revenue growth, it's almost identical to there's so maybe that's not so surprising.

Now on top of it though, we had the restructuring program which was largely focused on retirement.

When I was younger, I used to think you could put these restructuring programs in place and not lose any revenue in the short run, but I've learned from experience that is not the case.

The fact that we had retirement slow down a little bit was not a particular surprise here.

That happened, but we think -- we love the restructuring we did.

We think it positions us extraordinarily well for the future, so that was clearly the right thing to do.

So that hurt us a little bit in the fourth quarter, but as I said, even then we still came out right at the same level as our competitors; so we feel good about this going into 2017.

When we look at the outlook for 2017, I think the thing that we would most focus on is this is probably likely -- it's never -- you can never tell at this stage in the year.

But this is probably likely to be a slower growth for both lump-sum work a real slowdown in bulk lump-sum work compared to other years.

Now bulk lump-sum work, it varies.

2013 it was $28 million; 2014, it was over $75 million, I think it was around $77 million; it's been just under $50 million 2015 and 2016.

We think it's going to go down substantially in 2017.

But bulk lump sum is granular; one of the reasons we think it will probably go down is because we are likely to see several rate increases during the year.

It's not the absolute level; it's the arbitrage between what you can pay out the lump sum at and what you are recording it at as the accounting expense.

So 2017 might be a low year for bulk lump sums; in the end though, that may just mean that there is more work in 2018.

We see this as you've got to look at it on a multi-year cycle.

That's helpful.

Thanks.

Sarah DeWitt, JPMorgan.

Hi, good morning.

Just looking at the margin in the quarter, could you talk about how you see the margin expansion given the low organic growth and just walk us through how much came from OIP dropping to the bottom line versus integration savings versus if there was any FX-margin benefit?

Sure Sarah.

Hi.

We think again maybe just to step back to the margin trends for the year and we've been watching all the elements closely quarter to quarter and as we said in the third quarter we saw probably about a few percentage points in sequential drop in expenses and that trend continued into the fourth quarter.

Really we think it's the combination as John and I both referred to in our remarks.

It's the combination of continuing to push across the board on the savings initiatives which now you mentioned two of the elements and the third element is the business restructuring, so all of those kicking in, along with just the financial discipline that we are employing throughout the Company.

So margin comes gradually and last time we said we weren't sure that we saw all those efforts flow through, but I think this time you are seeing it; so I think those were the drivers.

Okay great.

Thanks.

And then separately, I'd be interested to get your thoughts on some of the macro issues post the US election.

If the US tax rate fell to 20% but there was no interest deduction, what would that mean for Willis Towers Watson's earnings?

And then also, would you be impacted by border adjustment at all since you're domiciled outside the US.

Would your services be considered an import?

So I think just generally on the taxes, it's two points.

One is it depends very much on the details of how these things are structured as to how we could do that.

Depending on exactly what's in there we could get a slight benefit; we could see our taxes even increase depending on what the details of that are.

I think whatever we see, anything we have modeled, it is still within us achieving our 2018 goals of being at the 25% or less so nothing that would impact that.

And by the way all of the modeling we have done is a worst-case because it's a steady-state assuming we don't make any changes in response to new tax legislation which we wouldn't do.

So overall, we don't -- we see any changes as being relatively modest.

It actually is possible under certain scenarios for our tax rate to go up, but it doesn't go up that much.

I think how a border-adjusted tax applies to services, the short answer is nobody knows.

Okay great.

Thank you.

Greg Peters, Raymond James.

Good morning, thank you for the call.

My first question is -- centers around your comments around the exchange solutions segment.

You talked about a global -- a slowdown or a normalization in that business.

Perhaps you could provide some additional color on that?

Yes sure, let me just mention Greg what's really going on here.

The biggest part of the business we have right now is the retiree part of the business.

The retiree part of the business we've been very fortunate.

We've gotten almost all of the really big cases that have gone on to the exchanges.

We won almost every one of them.

But there's, at some point you run out of -- there's fewer and fewer of those big ones to go out.

We did our largest client ever, we implemented last year.

And of course that's what led to the big enrollments we have for this year and the big revenue growth.

We don't have a similar really big one that we are implementing this year.

We're still going to get up to 110,000 retirees because we are getting a lot of them; but the one client that accounted for I think it was140,000, 145,000 retirees last year.

So 110,000 is still a great result, but it doesn't make up for that one big client; so we're seeing that so down a little bit.

What I would point to, and as Roger said, the active exchange is a smaller piece of the business.

In the long run that's what we expect to be by far the dominant part of the business.

Our growth rate was terrific there the last year, we really added a lot of folks.

We've already got four big clients signed up for 2018; so we are very enthusiastic about that, but that's a small part of the piece that's having that high growth rate.

Thank you.

And I know you have already commented in some other answers about the legacy OIP program, but if we could just step back and from a big picture perspective, I know periodically last year you expressed some frustration about the ability for these savings actually to fall to the bottom line.

And perhaps now that you have a year under your belt you could provide some updated perspective on the legacy OIP program and what you think might be impactful as we think about 2017 and 2018?

Let me make just two quick comments and then I'll turn it over to Roger who I know will want to provide some more color.

I think we were -- frustrated is the right word, that it was we had these good savings we were getting in OIP and for one reason or another they weren't dropping to the bottom line.

And I think one of the things we said to the analyst and investor community was we were actually going to be focused less on what the top-line savings in OIP were, but really how are we going to be getting margin improvement?

Are we going to be seeing things falling through there?

In the last quarter Roger talked about our sequential expenses being down and I think he said at that time, this is too early for us to say this is a real trend and we will wait and see what happens in the fourth quarter.

And as he just mentioned in his prepared remarks, I think the fourth-quarter has come in and we have said, okay they are down again and we are seeing margin improvement.

We feel like that focus is paying off and we are seeing some results there.

We're still not exactly where we would like to be, but we have seen parts of the operation, in Great Britain there was enthusiastic adoption of the OIP program, and we've seen it have a very positive effect on margins there.

One of the things we want to do is take some of the learnings from that and apply them worldwide.

Roger, maybe you want to add?

The only thing John I would add to that is again refer to probably one of the changes in our remarks this time and that we both talked about financial discipline.

And it fits what John said about our emphasis earlier in the year internally and externally just shifting more to really thinking about value or thinking on a more focused basis about value creation through margin enhancement in these programs.

It really seems, as we ended 2016, that was showing through in the financials.

It's something that we emphasized in the budget process really challenging ourselves to find the levers, to see the enhancement as we go forward and know how we had to manage different parts of the business to make sure margin came through as a result of those cost programs.

And the results now, as John said, are showing through in the margin line; so it bodes well I think for 2017.

Thank you for your answers.

Kai Pan, Morgan Stanley.

Thank you and good morning.

Just wanted to drill down a little bit specific on the cost savings the three buckets there.

I just want to make sure you mentioned that the integration savings will be $30 million in 2017 and $95 million from the OIP program and how much of that will drop to the bottom line?

Also you have the business restructuring in HCB segment.

How much savings will that be in 2017?

I'd say in terms of the individual amounts and consistent with what we just talked about on the last question, the drive here is to achieve a margin improvement.

We came in with 22.3%, we said EBITDA margin for 2016.

We are guiding to 23% to 24%, so if you take the $30 million plus the $95 million, plus some I don't know tens of millions of dollars, I don't have the specific number in front of me for the business restructuring, that's what's really driving the overall margin improvement which is in that range, based on the range we gave you of around 100 basis points.

Again, without specifying by individual program, that's margin improvement obviously of somewhere around $80 million.

Okay that's assuming there's no (inaudible) constant top line right?

Well actually we have -- the reason we don't have every last dollar in there is because there's some cost on the top line.

Okay great and my second question on the free cash flow side, you guided about $500 million buyback in 2017.

If you add about $300 million for the dividends, that's $800 million.

That's pretty much the same free cash flow in 2016.

I just wonder is there -- either there is no growth in free cash flow or you plan to use part of free cash flow for other purposes?

I think in general now that we are using round hundreds of millions of dollars here, you are doing the numbers correctly.

There are some other payments going out.

We do have related to some past acquisitions some payouts of contingent consideration, so that's a little bit of an add to what you mentioned.

But in general, we are circling call it available free cash, I don't know that anybody really uses that term, but maybe we made it up here.

We are looking to target available free cash to pay back in share repurchases.

That's roughly what we're trying to communicate.

Any plans as far as would acquisition be a focus here or not?

We would never want to rule out if there's some really attractive acquisition, but I think at the moment we think we're going to be hard put to find something that's more attractive than buying our own stock.

Great.

Thank you so much.

Adam Klauber, William Blair.

Hi, in the North American US brokerage operation in 2016, did the level producers -- was it pretty much flat, did it grow or did it decline?

How are you thinking about the level of producers in North America in 2017?

The level of producers was lower at the end of 2016 than it was at the beginning.

There's a number of moving pieces that occurred there.

One is that we have some smaller accounts that we have transferred over to -- we've sold some operations or we've transferred them over under some agreements we have to some other operations and we lose some producers when we do that.

We had some retirements.

We had some folks who moved from producer to non-producer status where they are still managing clients but they are doing it in a different way.

We did have some turnover among the producers.

We did have fewer producers at the end than at the beginning.

At the end of the day, I think the turnover rate was about what -- the voluntary turnover rate was about what we would have expected.

I think going forward for 2017 we'd expect to see an increase in the number of producers.

We expect to have more producers at the end of the year than we have now.

Okay great and one follow-up.

I'm not sure if you said it, but how is organic running as a wholesale business and again do you expect that in 2017 to be better than the other parts of IRR?

Yes, the wholesale business led by Miller was up in 2016 and we expect continued steady growth performance.

Okay.

Thanks a lot.

Mark Marcon, Baird.

Good morning.

Nice to see the progress.

I was wondering if you could just talk about a few things.

One, you did a great job in terms of outlining the area of revenue synergies that you ended up seeing in 2016.

I'm wondering if you can talk a little bit about the targeted revenue synergies that you would have at the highest point in your list and the highest aspirations for, for 2017 and 2018?

Well, we have, so -- let me just mention something about the revenue synergies too Mark.

When I went through them, the revenue synergies are the run rate that we were expecting to get from selling these things.

It's not the revenue synergies that necessarily occurred in the year.

So for example, when I talked about the exchange solutions and the revenue synergies from the mid-market, we sell to mid-market.

For the most part, they are going to be implementing January 1 that we're getting.

So the ones we sold in 2016, we're getting the revenue in 2017.

I fully appreciate that.

But it's not revenue that you would have seen there.

Likewise, even for the large-company P&C, most of those were sold in the second half of the year and so you haven't seen much of the revenue increases there.

So when we come to this as to where we'd expect to be, generally we were, as I said, the revenue synergies, we expect it to be about 5% to 10% of what the ultimate run-rate goal was for the end of 2018; we expected to be there at the end of 2016.

It's probably between about a third and 40% is where we would expect to be at the end of 2017.

That's great.

And then can you just talk about the exchange solutions in terms of what you ended up seeing there with the four large clients that you've got on the active exchange coming on in 2018?

Any way to size that in terms of number of lives or scope and how you would think the momentum would build with those four getting announced?

We don't have an exact figure to give right now.

I'd say it will be over 100,000 for those lives for those four clients we have there.

One or two of them we even talked about potentially whether they might decide to adopt in January 1, 2017, and I think, as we worked with them, it became clear that because of all the things they had to pull together as well as what we could have done, we probably could have adopted for January 1, 2017, but I think they wanted to make sure they had everything going well and we now have a very good plan with them.

So we found that encouraging.

It fits with the general theme that the larger companies, it's a longer time talking about it; it's more planning.

Their organizations are more complex; they are more risk-averse about doing it, so you need to build in a longer process for that.

But frankly, we feel very good about the enrollment season we had for what we're implementing for January 1, 2017, and we think this gives us a lot of momentum heading into 2018.

Great and if I can squeeze in two more.

One would just basically be with regards to the uncertainty around the ACA, how would you expect that to end up impacting your healthcare consulting business here in the US?

And the second question would be totally different, but on the CRB side; when we think about Todd taking over and the recent fine-tuning of the Management Team under him, how's that -- how do you expect just from a cultural perspective the adoption of a pay-for-performance kind of culture to translate to retention and performance?

Thank you.

Thanks.

The first one on the ACA, frankly the ACA doesn't impact our typical client all that much.

When we deal with it in the exchanges, we only deal with it in a few limited circumstances.

When we deal with it in our consulting, some of our clients that have lower-paid folks that they don't want to provide health care coverage for or have a lot of part-time workers or something, it comes into it, but it's not the biggest part of what our -- it's not a very large part at all of what our consulting does.

So I think in general, changes there won't have a significant impact on our healthcare consulting business.

Who knows maybe we'll get a few more questions about things.

In the CRB business, I think one of the things I know you didn't get a chance to see Todd and Carl in person at Analyst Day, but you did get a chance to hear them over the phone.

They are both individuals who really understand the segments that they are working with and leading.

Todd commands great respect throughout the organization.

People appreciate the fact that he has a long background in brokerage.

I think they believe in his vision of the future, so I'm as excited as can be to have him rolling out his program and leading that operation.

Great.

Thank you.

Elyse Greenspan, Wells Fargo.

Yes, a few questions.

First off, in your 2017 guidance are you including any impact from currency?

The guidance is based on the rates that I stated in my remarks.

I think it was $1.24 for the pound and $1.08 for the euro.

I think, I believe that's what we said

Okay do you know what would that translate to just in bottom line in terms of EPS?

Yes, I really don't have specific numbers.

There isn't a huge impact for us EPS-wise with changes to the pound and the euro because we do have in the legacy businesses one of them was net in the P&L, net long pound; the other was net short pound.

We do have profitability in the euro so a little more exposure there, but big movements don't drive a lot of -- or movements don't drive a big impact on EPS.

Okay and then in terms of the fourth-quarter margins, I know on the last call we had mentioned there potentially being a lower level of incentive comp just as the revenue was you said a little bit lower than you would have expected for this year.

Does that have an impact on the fourth-quarter margins?

Certainly, we do have a pay-for-performance system and we update that as the year goes on.

There would have been a little bit of an impact in the fourth quarter, but not something that was a big driver.

Not anything that was way out of whack, and in fact in, for the year we came in right in our range; we say in between 30% and 35% of our net operating income and we came right in there.

Okay and then in terms of the margin outlook for 2017, I know you did go through the components of the OIP and the merger-related savings that you expect to see fall to the bottom line, do you expect to see that even?

I mean will we see more of the OIP savings fall to the bottom line within your Q1 margins, just how do you think about the projection of that as we move through 2017?

I think there is, in this being the last year of OIP and I think there is a push of getting all the possible activity done by the end of 2017.

So I think OIP impact this year will be a little bit back-end loaded in the year.

I think the cost savings from the merger cost savings, probably pretty even.

I don't think there's -- I can't think of a big kind of driver of early or late of any of those programs.

The restructuring savings from the business of course occurred in the second half of 2016.

So we will have the biggest impact on margins in the first half of the year.

Okay great and one more question if I may.

Does your guidance for IRR assume a return to growth just within the reinsurance component of that segment in 2017?

Or how are you thinking about the outlook for the reinsurance business?

I think in our outlook the reinsurance business was roughly flat in the outlook.

Okay.

That's great.

Thank you very much.

Thank you and, due to time, this does conclude today's question-and-answer session.

I would like to turn the conference back over to Mr. John Haley for any further remarks.

Okay.

Thanks very much everybody and we look forward to talking with you after our next quarter, our first-quarter earnings call in May.

Ladies and gentlemen thank you for participating in today's conference.

This does conclude the program and you may all disconnect.

Everyone have a great day.